Jonathan Clements's Blog, page 37

The current state of Social Security and something to consider in your planning.

My view is that nothing will be done to fix the funding of Social Security through 2028 thus leaving people with concern for their future and to ponder rumors and misinformation. The latest report from the Trustees that should have been released by now is not available yet, but here is a summary from the last in 2024.

My opinion is to be conservative when planning your retirement in the next few years, and use 80% of your current projected Social Security benefit. I still don’t think it will come to that, but then again a didn’t think a lot of things in the political arena could happen, but have. 

Better to be extra conservative in your planning for now instead of creating your own crisis later. 

The projected actuarial deficit for the combined trust funds over the next 75 years is 3.50% of taxable payroll. So, raising the payroll tax by 1.75% on employer and worker gets the job done. That comes to about $20.90 per week based on BLS median worker earnings data. 

Summary from latest Trustee report:

“• The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits. 

• The Disability Insurance (DI) Trust Fund is projected to be able to pay 100 percent of total scheduled benefits through at least 2098, the last year of this report's projection period. Last year's report projected that the DI Trust Fund would be able to pay scheduled benefits through at least 2097, the last year of that report's projection period. 

• If the OASI Trust Fund and the DI Trust Fund projections are combined, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2035, one year later than reported last year. At that time, the projected fund's reserves will become depleted and continuing total fund income will be sufficient to pay 83 percent of scheduled benefits.”

Note that combining the two funds extends the crisis date, but fixes nothing.  Congress previously used a bandaid by transferring assets from the disability fund to the Old Age fund. 

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Ignore Valuations? By Jonathan Clements

Make no mistake: Stocks are expensive, with the companies in the S&P 500-index currently at 28 times trailing 12-month reported earnings, offering a dividend yield of just 1.3% and sporting a Shiller price-earnings ratio of 37. All three metrics suggest stocks are pricey by historical standards.

Meanwhile, with far less risk, investors can collect 4.5% in annual interest with 10-year Treasury notes and an inflation-adjusted 2.1% with 10-year inflation-indexed Treasurys. Alternatively, for those who favor cash investments, there’s Vanguard Federal Money Market Fund (symbol: VMFXX), with its 4.2% yield.

With stiff competition from conservative investments, and with all the talk of slower economic growth, you’d imagine that stocks would trade at lower valuations—or, at least, that would be my guess. So why are valuations so rich? Three possibilities:

Investors are anticipating that corporate earnings will soar. Perhaps investors are, but S&P Global sure isn’t. The research firm behind the S&P 500 is forecasting as-reported earnings will climb 15% in 2025 and another 15% in 2026—healthy gains, but hardly the stuff of irrational exuberance.
We’ve moved into an era where stocks have been repriced to permanently higher valuation levels. This might reflect the high growth rate of today’s mega-cap U.S. stocks, notably technology shares. Alternatively, it may be that investors are simply much more comfortable holding stocks than they were three or four decades ago. I say all this with trepidation given the infamous remark made by economist Irving Fisher just before the 1929 stock-market crash: “Stock prices have reached what looks like a permanently high plateau.”
The valuation yardsticks we’re using don’t capture how valuable today's companies are. For instance, because companies are using so much of their spare cash to buy back shares, they’re less focused on paying dividends, so it’s hardly surprising dividend yields are low by historical standards. Similarly, because today’s high-growth companies are rich in intellectual capital, they look far less appealing when their share prices are compared to traditional measures of corporate assets.

None of this is prompting me to make any portfolio changes. I long ago concluded that valuation measures were no predictor of short-term stock-market movements, and that my best bet was to buy, hold and look to the long term. Still, if the economy slowed sharply, I imagine today's rich valuations mean share prices could suffer a steep decline.

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Getting Back into the Market Now

Hypothetically, say you lost your nerve and pulled you money out of the market because you thought it was obvious the entire economy was ready to collapse due to incredibly high valuations for both stocks and real estate and finally implementing tariffs, only to witness the market quickly recover. How would you get back in?

I suppose this person (not me, of course, since I am a long term index investor) would be best served using a dollar cost average, but over how many months to get back in? I'm thinking 9 months... maybe?

Would you agree that at this point Lump summing it back in at this point is folly?

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Funded Ratio vs Monte Carlo – Different Routes to Get to the Same Destination (or not)?

I find the "liability matching" concept as outlined in Dr. Wad Pfau's "Funded Ratio"  helpful based on our household-specific inputs I provide.  This analysis, while based on different inputs than those of Monte Carlo simulation, has given me another way to project whether we expect to have adequate financial resources for the remainder of mine and my spouse's life.

I have used Mike Piper's simplified funded ratio example spreadsheet to "run the numbers" using the following inputs for each year of our expected life spans:



1) Select a conservative, real (after-inflation) discount rate, such as the yield on 10-year TIPS.






2) Enter current portfolio value.








3) Enter income and expense values in "real" terms as well (i.e. today's dollars).






4) The income column should not include income from the portfolio (i.e., dividends/interest). It should only include work income, Social Security, pension, etc.


5) The expense column should include all discretionary and non-discretionary expenses, including taxes.





6) Be sure to extend the calculation to a year that is beyond your life expectancy.

What have been the strengths and weakness of any of your experiences using the "funded ratio" projection?  

How does it compare to the Monte Carlo simulation in regards to getting to the same destination- better certainty about a successfully financed life span(s)?

Does one do a better job at forecasting success at a more personalized level?

 

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Bengen’s updated 4 pct rule

This floated across my screen a couple of days ago.

Bill Bengen introduced the 4% rule in 1994.  It suggested that a one may safely withdraw 4% from a portfolio in the first year of retirement and it would be likely that portfolio would last for 30 years.

Bengen is publishing a new book A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More

In it he updates the rule but also provides a 55/45 model portfolio.  This is my understanding:

11% U.S. large-cap stocks


11% U.S. midcap stocks


11% U.S. small-cap stocks


11% U.S. microcap stocks


11% international stocks


40% in intermediate-term U.S. government bonds


5% in cash, represented by U.S. Treasury bills

Bengen states that slightly overweighting small-cap and microcap stocks could "increase [the safe withdrawal rate] maybe a quarter of a percent, which is worth it."  He acknowledges that small- and microcap-stocks are very volatile classes and should be used in moderation. My portfolio includes small caps, and I’ve always wondered what an appropriate allocation would be. With Bengen's allocation I have more info on this.

The new initial safe withdrawal rate has been increased to 4.7%. In practice the SWR could be increased by the rate of inflation each year. In the article I read he also suggested that a reasonable starting point for withdrawals today would be between 5.25% and 5.5%.  This is lower than the historical average withdrawal rate of nearly 7%. Bengen acknowledged that "you're giving up a lot, but those are the circumstances we face."

He was quoted "The 4.7% is still a 'once-in-a-century worst-case scenario' number," he said, and retirees "should probably be more optimistic than that." He considers current inflation to be moderate and stock market valuations are "very high."

Bengen uses the Shiller CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio) to measure valuations. He noted that while the historical average is about 17, today's CAPE is nearly double that, in the mid-30s.  "I think if you get much above the low 20s, the risk starts to build," Bengen said, warning that historically, high CAPE ratios have not lasted long and typically preceded sharp declines.

Here’s a brief synopsis of the book over at Amazon:

https://www.amazon.com/Richer-Retirem...

 

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Managing Transitions: Best Practices for When a Practitioner Passes Away

On Friday, May 15,  I received the attached email Alert from the IRS Office of Professional Responsibility. The email topic, When a Practitioner Passes Away, is mostly focused directly at anyone subject to Circular 230 that practices before the IRS, typically attorneys, certified public accountants, enrolled agents and others who prepare tax returns for pay. I think it likely that every state also has their own additional laws and regulations regarding protection of your data.

Over my career I have found myself being a subsequent tax preparer numerous times where a CPA colleague has died. Lately, I have also been involved with "orphan" clients where a firm has merged their practice with a different (typically larger) firm but the new firm has decided to no longer offer tax services to a particular class of clients or specific clients. Frequently, those orphan clients are either not expected to be profitable in the eyes of the new firm, the new firm does not have the staff to appropriately serve the client, the client has a history of actions, such as providing initial documents just before a tax deadline, not paying invoices timely, and so forth which can stress the process of providing accurate and timely tax services, or all of the above.

The nightmare situation for clients does occur when a client has just dropped off original information to the preparer, the preparer dies and there is no one to return the information and that job of returning client data falls to a non preparer volunteer executor. You may want to request any needed extension yourself if you are near a tax due date.

I agree with the article's first point that early and often communication with your existing preparer is key to a smooth transition to a new preparer.

Your original data is yours, and as such that original data should be returned under the rules tax preparers operate under, but the time frame may not be to your liking when the tax preparer dies in possession of your original data.

The files your preparer creates, either paper, electronic or combination are typically owned by the preparer or the firm that the preparer works for. When the preparer dies the responsibility to protect your personal data continues even though the preparer has died. At some point if appropriate planning and actions have not been done to transfer the files upon the preparer's death and followed through on, that useful client information in the preparer's file will likely be destroyed when the statute of limitations period expires under the preparer's obligations to maintain information for returns they have prepared. Widows and executors of deceased preparers who have client files do not want continued liability to store and protect client data.

Do yourself a favor and either give your preparer (complete) copies of the original data or upload data directly to the preparer's portal whichever the preparer prefers instead of providing original documents. While your at it take the time to answer all questions on a tax organizer, but only you want the most accurate return at the lowest cost.

Many tax preparer's have software that can print a "reviewers copy" that the preparer uses as part of a final review after all data has been input that includes analytical information, diagnostic information and some detail of data input that does not appear in the copy sent to the government or typically to you. You may not be a tax expert, but you may spot something the preparer did not that just does not appear correct. I think most preparers are thrilled to have clients who review and ask appropriate questions.

Another best practice is for the client to review the draft return, prior to the required formal transmittal authorization, of the prepared tax return before transmittal. You may be able to do a better job in your client review of the preparer's work if you are doing so from a reviewer's copy. Ask your preparer if you can have a reviewer's copy, often sent to you as an encrypted pdf attachment by email or sometimes found on the preparer's secure portal , of the draft return for your review if they have one.

Ultimately, the government(s) considers the taxpayer(s) responsible for what is on the return even if a mistake was made by a preparer.  Please spend the time to actually review your draft return prior to transmittal. I believe it is typically always better to extend than have to amend.

I hope you do not have to ever go through the additional stress of your preparer dying with your return in process.

 

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Almost There by Edmund Marsh

After years of retirement planning, the day has indeed arrived—almost. I’ve recently become a part-timer, working just three days each week in the outpatient physical therapy clinic, plus one Saturday per month at the acute-care hospital. Though I may be just semi-retired, the load already feels a whole lot lighter.

How so? For starters, I’m focusing less on gaining more from my job. Oh, I’m still keen to treat patients. That’s what drew me to physical therapy in the first place. But I’m stepping back from the sundry other jobs that have attached themselves to me. Instead, I’ll nudge the younger folks toward new responsibilities as I concentrate on giving my best to a shorter schedule.

How short? I’ve trimmed my three workdays to eight hours each, with afternoons free for other pursuits. My brief week of short days feels like a perpetual weekend, with its mix of work and play.

There are trade-offs, of course. Shorter hours leave me with less earned income. In exchange, I get more disposable time. How to spend it? 

Home provides plenty of projects. My list is long, from a bedroom and bath renovation inside to demolishing and resurrecting storage buildings outside. Though I enjoy both the planning and the labor, I’ll probably employ a hybrid of do-it-yourself and hired help. Other tasks–like breaking up the concrete footing and floor of the old chicken house I tore down two years ago–I’ll have to tackle myself. There is little room for equipment, and manual laborers are scarce.

My garden beckons as well, especially the vegetables. From the peas I plant in January to the tomatoes of summer, I have vegetables in the garden and on the table every month of the year. That’s not a boast, just the product of my passion for nurturing plants to grow and yield fruit, and my family’s appetite for their taste. 

My wife reminds me, however, that work shouldn’t consume all our retirement time. She’s ready for some leisure, especially travel. Alas, there’s a hitch to her plans. Our mothers are closing in on the century mark. Each continues to live in her home, which we fully endorse, but require help from us. As a result, our wandering is tethered by familial responsibility.

Between family pulling one hand and the lure of play the other, where’s the balance as my wife and I seek to find fun together? We’ve found part of the answer close to home.

For the last couple of decades, my wife and I have sacrificed our shared time to donate to busy, separate schedules. We are ready to reclaim that time, beginning with sunrise walks on my days off work. The exercise is moderate, but the conversation supplies substantial emotional nourishment. I’m reminded of the “windshield time” of a long drive together. 

For real food, we’re venturing farther afield. We both love a good barbeque joint, but our standard meal is heavy on lighter fare. Since quality restaurants are scarce in small-town Georgia, especially those that serve the kind of fresh ingredients we prefer, we’re prepared to drive. After polling friends, we compiled a list of restaurants to check out in the surrounding communities. We’ve heard of married couples scheduling “date nights” to get a break from home life, but we have never indulged–until now.

If our local plans sound unambitious, then so will our travel itinerary. Yes, we’re now just partly-employed, with a lot more free time to devote to one of my wife’s loves. But as I indicated above, we feel bound to stay near home. We figure a five to six hour drive is the limit of our leash. Rather than sit home and sulk, we’re determined to ferret-out enough fun within this perimeter to keep us busy until our circumstances change.

Our first area of focus is the locale where our daughter attends college. Her school sits atop a mountain overlooking the small city where my wife found her first physical therapy job. We’ve moved a few hours away, but make annual return trips. We've sampled nearly every attraction on offer there, but our current plan puts us on the hunt for different game. 

Our new strategy calls for frequent, short trips to create an extended, intermittent vacation. Our main base is a cozy Airbnb with enough amenities to feel like a second home. It lies in a quiet neighborhood, 15 walking minutes from an ice cream shop and a few restaurants, and a short drive from dozens of others. 

But its best feature is proximity to miles of hiking trails. A five-minute stroll puts us on a trail up the mountain. From there, we can choose to loop back to our start in an hour or two, or make a day of it. We can even wander over to the college campus for a chat with our daughter. 

For my daughter’s Easter break from classes, we traveled to our new spot to keep her on site to prepare for final exams. We did most of the hiking while she did all of the studying, but one morning the three of us drove across town for a few hours’ scrambling over boulders beside a cascading stream. I won’t say the walk was on par with the wilder trails we’ve trod, but on the trip back to our lodging we stopped to dig into a decent Mediterranean lunch. This style of hiking has its appeal.

Our new lifestyle may be termed “retirement-lite” by folks who have permanently replaced their work schedules with weekday tee times and travel plans, but it fits us well. It affords me a measure of the work that soothes my psyche, while providing my wife with temporary relief from her travel itch. And it gives us both more of the element that has been missing from our lives for too long–time with each other.

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Reflecting on life experiences. Money well spent. How about yours?

It has been written here and elsewhere that there is more value in using your money for experiences instead of buying stuff. I fully agree. 

Experiences with family and friends are most important especially as you get older, but beyond those, what experiences stand out for you? 

Most of our traveling was after we retired. We isolated funds for that purpose. While working, our travel was limited to business events, mostly employer paid. That’s how I had dinner at Mar-a-Lago Club.

During working years family demands, two mortgages and college expenses limited travel. So, when those were done and we finally got the chance to travel, we really went for it -- and the result was a host of memorable experiences.

Here are few of ours.

Kissing the Blarney Stone - and getting dizzy

Walking on Hadrians Wall - those Romans could build

Being stopped on the road as a twenty minute long herd of buffalo crossed

Attending an Papal audience in St Peter’s Square

Placing a prayer in the Western Wall - surrounded by armed soldiers 

Walking on a warm lava flow - with steam rising

A home cooked meal at a friends house in Bordeaux - best meal of my life 

Walking on Omaha Beach - I brought home sand so I will never forget 

Visiting Auschwitz-Birkenau - no words to describe, but tears to remember

Eating French Fries on the Eiffel Tower - pretty soggy

Making snowballs atop mountain Etna in August - kind of weird 

Crashing in the Arizona Dessert in a hot air balloon - we ran out of fuel 

Walking among penguins in the Falklands - fascinating and smelly 

Hovering over the Statue of Liberty in a helicopter - a bit scary, but quite a view 

Sailing the canals in Amsterdam - almost as dirty as Venice

Riding in a blimp over Manhattan - attracting attention

Being quarantined in a ships cabin for two weeks - get to know your spouse

Being yelled at by a Russian soldier in the Kremlin - a better understanding of Russia 

Sailing though Panama Canal - read the book The Path Between The Seas, by David McCullough

Riding a camel in Morocco - one off the bucket list 

Walking the field of the Charge of the Light Brigade - a history lesson

Riding on the Maid of the Mist under Niagara Falls - wet and incredibly noisy 

Playing golf with Jim Furyk - those pros make you feel inadequate 

Walking Revolutionary and Civil War battlefields and finding my great, great grandfather’s name on a Union roster - emotional especially since I have his full military/medical records. He fell off his horse an got a hernia 

And many others …

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Saturday’s Newsletter: Before You Complain

Today's newsletter is currently getting sent out -- but it's happening at a snail's pace. Distribution started at 3 a.m. ET. Usually, it takes a few hours to send out the 25,000 or so emails, but today it's far slower. I assume there's some problem at the email distribution service that the site uses. Sorry for the slow delivery. In the meantime, everything in the newsletter can be found by scanning the homepage, including the latest articles from Adam and me.

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Great article on aging

Great article in the WSJ about aging. I hope the link below is non paywall.

https://www.wsj.com/health/wellness/a...

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